The Employment Appeal Tribunal (EAT) holds that a cap applied to a contractual redundancy payment scheme was justified by the employer and did not constitute age discrimination.

Facts:

Mr Hastie had worked for Kraft Foods UK Limited (Kraft) for almost 40 years when he applied for voluntary redundancy. Kraft operate a voluntary redundancy scheme where employees receive 3.5 weeks pay for each year of service. However redundancy payments are capped if they exceed the amount the employee would have earned had they remained in employment until retirement (at 65). Mr Hastie, who was two years from retirement, had his redundancy pay capped at £76,560, a reduction of £13,600. Mr Hastie claimed that the cap constituted unlawful age discrimination.

It was accepted before the Employment Tribunal that the cap was a provision, criterion or practice (PCP) which disproportionately affected older workers approaching retirement age. Therefore the cap would constitute age discrimination unless Kraft could justify it. The Employment Tribunal upheld Mr Hastie's claim on the basis that the loss of £13,600 to Mr Hastie was 'significant' but was not a significant proportion of Kraft's redundancy bill. Therefore the cap was not justified. Kraft appealed.

The EAT Decision:

The EAT overturned the Employment Tribunal's decision and held that the cap was justified. In the EAT's view the object of Kraft's voluntary redundancy scheme was to compensate employees for their loss of earnings had they not been made redundant, which is the purpose of a redundancy payment. Therefore it is legitimate for a redundancy scheme to apply a cap in order to prevent the employee from receiving a 'windfall'. Furthermore the cap in Mr Hastie's case was a proportionate means of achieving that aim, (i.e. it was justified) and therefore not discriminatory on the grounds of age.

Conclusion:

Many contractual redundancy payment schemes apply a cap or a taper for employees close to retirement age. A cap is likely to be a PCP, meaning that unless the employer can objectively justify applying one to a redundancy payment it will be discriminatory.

In this case, preventing the employee receiving more money from a redundancy payment than he would have received had he remained in employment up to retirement age, justified capping his redundancy payment. This was because the EAT held that the purpose of a redundancy payment is to compensate employees for the loss of their job. However if the DRA is abolished and employees can continue working after 65, it will be difficult for employers to justify capping redundancy payments based on projected earnings up to 65. Although a cap may be possible if employers operate a compulsory retirement age (CRA), employers will have to objectively justify the use of a CRA after 1 October 2011.